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There are some changes being made through the IRS regarding 1099 that are effective for 2020’s filing. We wanted to keep you guys in the loop by giving you a quick run-down. The information below is a lot of tax-talk and may seem intimidating, but it is fairly simple in how it affects interior designers. The changes involve how 1099 filing are submitted through the IRS.
The good news is that, if we are handling your 1099 filings, we will do the heavy lifting and determine which form to use when we file directly with the IRS. Not included in your package? Read on for details on what you need to know to remain compliant with 1099 tax filings for 2020.
Beginning with the tax year 2020, employers should no longer report non-employee compensation on Form 1099-MISC. Instead, the IRS has released a new form called Form 1099-NEC.
Non-employee compensation, which was previously reported under Box 7 of the old Form 1099-MISC, should now be reported on Form 1099-NEC. However, Form 1099-MISC is still used for other things, such as reporting gross proceeds to an attorney, Section 409A deferrals, and nonqualified deferred compensation income.
As a result of the new 1099-NEC and redesigned 1099-MISC, the overall process for reporting non-employee compensation is changing for the 2020 tax year. Therefore, we’ve compiled the most essential details regarding the changes for you, so that you know how to prepare both forms properly.
Note: if we are handling your 1099 filings, we can handle determining which form to use during the filing.
2020 Instructions for Form 1099-NEC
Who Gets Form 1099-NEC?
The IRS says, in general, that you need to issue Form 1099-NEC if the following four conditions are met:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
- You made payments to the payee of at least $600 during the year.
Common examples of nonemployee compensation include:
- A fee paid to a nonemployee (such as an independent contractor)
- Professional service fees, such as fees paid to attorneys (including corporations), architects, and accountants
- commissions paid to a nonemployee salesperson that are subject to repayment but not repaid during the year.
Critical Dos and Don’ts with Form 1099-NEC
- Do verify that the recipient’s taxpayer ID is correct. You must have Form W-9 from each recipient with the current taxpayer ID before you complete Form 1099-NEC.
- Don’t use Form 1099-NEC to report personal payments.
- Don’t use Form 1099-NEC to report employee wages; use Form W-2 instead.
- Don’t report gross proceeds to an attorney (not fees) on Form 1099-NEC; use Form 1099-MISC instead.
- Don’t use Form 1099-NEC to report payments of rent to real estate agents or property managers; use Form 1099-MISC instead.
Filing and Submitting Form 1099-NEC
- Distribute to recipients by January 31 (February 1 in 2021; since January 3, 2021 falls on a Sunday)
- File with the IRS by January 31 (February 1 in 2021)
2020 Instructions for Form 1099-MISC
Who Gets Form 1099-MISC
File Form 1099-MISC for each person to whom you have paid during the year:
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
- At least $600 in:
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Critical Dos and Don’ts with Form 1099-MISC
- Do report gross proceeds to an attorney (not fees) on Form 1099-MISC.
- Do complete a 1099-MISC if you made royalty payments of at least $10 during the year.
- Do use Form 1099-MISC for miscellaneous income, such as rents, royalties, and medical and health care payments.
- Don’t use Form 1099-MISC to report personal payments.
- Don’t use Form 1099-MISC to report employee wages; use Form W-2 instead.
Filing and Submitting Form 1099-MISC
- Distribute to the recipient by January 31 (February 1 in 2021)
- File with the IRS by February 28 (March 1 in 2021) if filing in paper, or March 31 if filing electronically
How this applies to Designers:
Again, this may seem like a ton of information. However, there are not any major changes in the 1099 filing procedure. The changes essentially affect how 1099s are filed through the IRS and the number of forms you may need to file.
In general, the form on which you report non-employee compensation to the IRS has now become a form called the 1099-NEC. Therefore, when filing 1099s, you will need to be cognizant of the change and make sure you are completing and filing the correct form.
The rules still apply for the collection of W9’s from your vendors or contractors that are paid check or cash in the amount of 600 or more for the year.
The good news is that if we are handling your 1099 filings, we will handle the majority of this process for you and determine which form to use when we file directly with the IRS.
If you have any questions, comments, or concerns, please reach out to us! We are always here to support you and are always happy to help wherever we can.